Broker-Dealer FTN Financial Securities Corp. Charged with Aiding Sentinel in Fraud
The SEC brought charges against broker-dealer FTN Financial Securities Corp. (FTN) last week for allegedly assisting the now bankrupt Sentinel Management Group, Inc. (Sentinel) in covering up Sentinel’s alleged 2006-2007 investment fraud.
In August 2007, two days after Sentinel filed for Chapter 11 bankruptcy, the SEC charged the Illinois-based investment adviser with misappropriating, commingling, and leveraging client assets without proper authorization. Though Sentinel told its clients that their investments would be placed primarily in highly liquid cash management products, the SEC claimed the firm used client assets as collateral for a bank loan used to finance trading in numerous illiquid securities.
In the complaint filed last week, the SEC alleged that FTN helped Sentinel carry out the fraud through the approval of a five-day reverse repurchase transaction. In the complaint, the SEC claimed that FTN "should have known that Sentinel would use the Repo Transaction for an improper purpose," because of statements made to several FTN employees in March of 2006.
"Earlier in March 2006, before engaging in the Repo Transaction, FTN had engaged in a transaction with Sentinel to purchase securities from Sentinel at quarter-end, a transaction that Sentinel told FTN employees it needed to ‘make our loan look lower.’ In addition, toward the end of 2006, before engaging in the Repo Transaction, a Sentinel employee made statements to one of those same FTN employees suggesting that Sentinel intended to use the Repo Transaction to circumvent a regulatory requirement," wrote the SEC in the Complaint.
According to the SEC, Sentinel used the Repo Transaction with FTN to temporarily pay down a portion of the client-collateralized bank loan in order to reduce the amount Sentinel had to report on its 2006 year-end financial statements. Sentinel did not include the Repo Transaction on the statements.
FTN neither admitted nor denied the SEC’s charges, but the firm did consent to the entry of the SEC’s Cease-and-Desist Order. The Order requires FTN to pay disgorgement of $1,495,878.00 and prejudgment interest of $377,758.73.